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Financial Check-Up for Grain Producers

Date: 
Author: 
Glenn Wachtler
Educational Opportunities: 
Articles
Interests: 
Grain, Young, Beginning Farmers
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Most grain producers I work with spend some time at the end of the year working on tax planning and completing their balance sheet. The balance sheet and income statement show the fruits of your labor from the past year. They are the foundation of record keeping and critical to do analysis of your farm’s financial management and profitability. Some grain producers like to get a quick financial check-up before the year comes to a close. Here are a few quick and relatively easy formulas that I like to use as a financial check-up with grain producers. 

Working capital per acre farmed
Working capital is the value of all your current assets less your current liabilities. Current assets are typically: cash and liquid savings accounts, grain inventory, prepaid expenses, accounts receivable, and marketable livestock. Current liabilities usually consist of operating and inventory loan balances, accounts payable, one year’s term debt payments on items such as equipment and real estate. Be sure to also include any other liabilities due in less than one year. The difference can be positive, which means you have some liquidity, or negative, meaning you are illiquid and have some work to do.

I counsel farms to maintain a minimum of $250 for each acre farmed. In other words, the dollar amount of working capital divided by total acres farmed, both owned and rented. This gives you the ability to make timely payments on term debt, capture supplier discounts, or act as a cushion during a difficult growing season or low grain prices. With short-term interest rates increasing and low commodity prices, working capital is more important than ever.

Compeer Financial's Grain Margin Manager and Worksheet can help you make these calculations. 

Equipment debt per acre farmed
A producer should evaluate their intermediate term debt before taking on a new loan to purchase additional equipment or vehicles. There are many reasons to purchase that new piece of equipment, and the level of your total intermediate term debt divided by your total acres farmed may help you decide if you want to take on the additional debt, how to structure your payments, or even postpone the purchase.

I counsel my clients to keep the total of all equipment payments added together less than $60.00 for acre farmed. To find this number, use the sum of the annualized principle and interest payments divided by the sum of both owned and rented farm ground. Staying below $60.00 per acre has been a challenge with higher equipment prices than in the past and aggressive tax planning, but equipment payments can have a large impact on your cost of production. 

Another challenge has been that high land rents can make expanding a poor choice to spread out costs at this time. Even with the challenges of the absolute level of payments per acre, you need to consider this ration when making management decisions.

Total land debt per owned acre
Like all of the ratios already discussed, total land debt per owned acre must be considered along with the whole financial picture because each producer will have relative strengths and weaknesses. Land productivity will also factor heavily into how much debt one acre can support. In general, I like to see about $2,500-$3,000 maximum total real estate related debt per each acre owned for productive farmland in the upper Midwest. Even if the debt is related to only one parcel, I spread that across all owned acres to get this quick ratio. 

This quick check up is intended for additional guidance. Every producer has unique circumstances that make looking at the whole financial picture critical, but this may help you determine which areas that you want to take a deeper look into at year end. Be sure to download the Grain Margin Manager Worksheet to help you make these calculations.
 
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